In The Headlines
Costco Becomes a Top Auto Seller
Costco has benefited as Americans grow wary of car dealers. In fact, the firm has increased the annual number of auto sales it has arranged by 99% since 2008. For instance, Ron Schurter did not bother visiting a dealer when he was in the market for a new car. He hit his local Costco. There was no haggling or upselling. There was just the price the warehouse retailer offers its members: about $39,000 for a 2015 Toyota Highlander, $4,000 less than the manufacturer’s recommended price. Schurter signed the contract and picked up his SUV from a Toyota showroom. “I’ve been telling everybody,” says the 75-year-old retiree from Yorba Linda, CA, “I probably won’t shop anywhere else.”
Last year, Costco Wholesale moved almost 400,000 vehicles of all major brands in the U.S., twice as many as in 2008. Without fanfare, the membership-only merchant, better known for selling flat-screen TVs and jumbo-size boxes of cereal, has pulled within striking distance of the Number 1 car retailer, AutoNation, which sold 533,000 vehicles last year. “That’s a much bigger number than I would have expected,” says LMC Automotive analyst Jeff Schuster. “This reinforces that everybody wants a deal, but they don’t want all the headaches of haggling.”
Costco is tapping America’s growing wariness with car dealers. Dozens of services such as TrueCar have sprung up to improve the auto shopping experience by offering price transparency, one-stop comparisons of multiple brands and models, and even help with negotiating. At the end of 2014, 65% of new-car buyers reported using such services, up from 40% in 2008, says J.D. Power.
Costco does not sell cars per se. Working through an auto-buying service called Affinity Auto Group, the $112.6 billion retailer uses its purchasing power to negotiate discounts for its more than 45 million U.S. cardholders. Costco’s huge scale gives it the clout to insist that local auto partners that sell through Affinity beat the prices of their rivals. Ken Ryan, who runs a GMC dealership on Long Island, says Costco’s tough negotiations mean buyers save as much as $1,000 per vehicle. The retailer fields a team of mystery shoppers to make sure dealers stick to the agreed upon price.
Last October, Costco and General Motors offered U.S. buyers a $500 store gift card plus a non-negotiable price for most GM models. In the fourth quarter of last year, GM sold 43,300 vehicles through Costco, or about 6% of the automaker’s total domestic sales in that period. The Costco promotion helped GM attract buyers in California along with buyers in Western and Southern states, where foreign brands are more popular.
Costco makes no money on the auto sales. It offers discounted vehicles to attract members and keep existing ones paying the club’s $55 annual fee. “Their primary, overwhelming interest is members’ willingness to join and renew,” says John Rand, senior vice president for retail insights at Kantar Retail. “The filter by which they do anything is, ‘What do my members think?’ ”
Eight years ago, it was sometimes difficult for Costco to get the attention of carmakers for national promotions, says Gina Paolino, president of the Costco Auto Program. Today, automakers are coming to them, and there is a waiting list of dealers keen to participate at almost every Costco warehouse. “Now we have a story,” Paolino says. “We’re getting more interest because of the success.”
The U.S. Poultry Industry Reels from an Outbreak of Avian Flu
A bird flu vaccine does not work well enough to approve it for emergency use against the current outbreak that has shaken the Midwest poultry industry, the U.S. Department of Agriculture said recently. “The vaccine currently available offers just 60% effectiveness in chickens, leaving 4 in 10 birds unprotected. The vaccine’s effectiveness in turkeys is still being studied,” it said. By the USDA’s count, bird flu has cost chicken and turkey producers more than 45 million birds since early March, mostly in Iowa and Minnesota. The USDA said it will continue to support efforts to develop more effective vaccines, and will re-evaluate its decision as those become ready for use.
A major concern is that several significant U.S. trade partners have told the USDA they might ban all imports of U.S. poultry and eggs, which could cost producers billions of dollars in lost exports. The reason other countries might balk is that tests for the disease in poultry products look for the same antibodies that vaccines trigger an animal to produce.
With avian flu devastating a significant portion of the nation’s egg-laying hens, major food companies and restaurant chains are bracing for shortages and scouting the country to find alternative supply sources. Roughly 87% of the birds stricken with the disease are laying hens, according to the Department of Agriculture, and many of the eggs they lay are turned into ingredients used by food businesses in things like scrambled egg patties and baked goods. So while most food companies say they have enough eggs to meet their short-term needs, corporations like McDonald’s, Panera Bread, Unilever, and General Mills are seeking other suppliers and substitute ingredients. “One of our suppliers has been directly impacted by avian influenza (AI) despite their taking appropriate biosecurity precautions,” Lisa McComb, a spokeswoman for McDonald’s, wrote in an email. “We proactively developed contingent supply plans, and we do not anticipate an impact to our ability to supply eggs to our restaurants and serve our customers.”
Cargill Kitchen Solutions, a unit of Cargill, the large food and agriculture company that supplies food service and restaurant businesses with egg products, is one of McDonald’s suppliers. “The A.I. cases have impacted the entire egg industry, including several Cargill Kitchen Solutions egg supplier locations,” the company said in an email, referring to avian influenza. Post Holdings, which uses eggs in its products and sells processed eggs to others, recently said the flu crisis would slice about $20 million out of its cash flow—and that was before the Agriculture Department confirmed an outbreak among 1.7 million hens at another facility that supplies the company.
At Panera Bread, for example, eggs are used in some baked goods, as well as in its egg and egg white breakfast sandwiches and soufflés. “Eggs are a relatively small part of our menu, and at this moment our supplies are intact,” said Ronald M. Shaich, chief executive of Panera. “But we’re going through a series of reviews about how to ensure supply lines are there.” Paul Ray, Panera’s vice president for sourcing, said there was a lot of confusion about how extensive the impact on the egg supply would be, and sometimes even about where eggs are used in the supply chain—suppliers themselves have suppliers, which in turn have other suppliers. “Just accumulating information can be difficult—this continues to materialize,” Mr. Ray said. “Two weeks ago, it was an issue but not as significant an issue as it has become in the last 10 days.”
Some firms have benefited from the spread of the avian flu. For example, Hampton Creek, a small business that makes plant-based egg substitutes, shipped tens of thousands of pounds of its Just Mix powdered egg substitute to General Mills, which uses egg products in things like its Betty Crocker Angel Food Cake Mix and a variety of refrigerated cookie doughs.
Consumers have also weighed in on the avian flu situation. Slightly more than half of consumers surveyed by the NPD Group, a consumer research firm, had concerns about avian flu and its implication for health and food safety—even though the Food and Drug Administration has repeatedly said it is unlikely that eggs in the marketplace would be contaminated in any way, and no chance for harm if eggs are cooked properly.
Citations
1. http://bloom.bg/1GmKRAQ – Bloomberg
2. http://www.cnbc.com/id/102732557 – CNBC
3. http://nyti.ms/1Q20Bs4 – New York Times
The Good News Is . . .
• Total nonfarm payroll employment increased by 280,000 in May, and the unemployment rate was essentially unchanged at 5.5%, the U.S. Bureau of Labor Statistics reported. Job gains occurred in professional and business services, leisure and hospitality. The labor force participation rate moved higher to 62.9%. Wages also showed growth, rising $ 0.08 an hour, equating to an annualized increase of 2.3%.
• Home Depot, Inc., a leading home improvement retailer, reported earnings of $1.16 per share, an increase of 20.8% over year-ago earnings of $0.96. The firm’s earnings topped the consensus estimate of analysts by $0.01. The company reported revenues of $20.9 billion, an increase of 6.1%. Management attributed the company’s results to favorable weather and continued recovery of the U.S. housing market.
• Intel, the world’s largest maker of chips, said it would pay $16.7 billion ($54 per share) for chip company Altera. Intel, based in Santa Clara, CA, hopes to pick up customers, flexibility, and a way to keep its manufacturing going at full speed. Intel hopes Altera puts it in better shape to compete for two of the biggest emerging markets—large data centers and computer-enriched machines that work with other devices. A vast complex of chips and sensors constantly feeds, and is being fed by, globe-spanning systems with millions of servers, from the likes of Amazon and Facebook, in a system that is expected to grow much bigger in the next few years. Altera’s primary chips help Intel target that market. The company’s chips can be reprogrammed once they leave the foundry, altering some of their functions. Intel’s semiconductors are more powerful, but lack that flexibility.
Citations
1. http://1.usa.gov/IOsIPK – Bureau of Labor Statistics
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://thd.co/1Iw8MhI – Home Depot Inc.
4. http://nyti.ms/1QjQajV – NY Times Dealbook
Planning Tips
Tips for Switching to Medicare
The hand-off from employer health insurance to Medicare can be one of the trickiest challenges you will face in managing your retirement. The rules are full of pitfalls that can cost you thousands of dollars in unnecessary premiums or lead to a risky gap in coverage. Here are answers to questions that often come up about the work-to-Medicare transition:
Is the Medicare enrollment process automatic? – Only if you have already claimed Social Security benefits by the time you turn 65, which is the Medicare eligibility age. If not, Medicare requires you to sign up in a seven-month window before and after your 65th birthday, unless you have employer coverage or coverage through your spouse. Failing to sign up when required is costly. Monthly Part B premiums, which cover doctor visits and medical supplies, jump 10%–over your lifetime–for each full 12-month period that you should have been enrolled. Penalties also are applied for late enrollment in Part D (prescription drugs). If you retire after 65, you can take advantage of an eight-month special enrollment period that begins the month after employment ends.
Should you enroll in Medicare even if you are offered COBRA health insurance when you leave your job? – Yes. Although you might need COBRA to cover a spouse or dependent child, Medicare must be your primary insurance coverage once you are over age 65. Besides leading to penalties, missing the special enrollment window could mean going with nothing but COBRA until the next enrollment period, providing limited coverage to retirees for as long as a year.
What if you are still working when you turn 65? – If your employer has fewer than 20 insurance-eligible workers, Medicare will be your primary coverage, so go ahead and enroll. You can stick with your employer’s coverage and forestall Medicare enrollment if your employer has 20 or more insurance-eligible workers. The insurance must be similar to Medicare benefits as measured by a set of standards set by the program. You also could enroll in Medicare, which would provide secondary coverage to fill gaps in your employer’s plan. One caveat: Do not enroll if you contribute to a Health Savings Account (HSA) linked to a high-deductible employer plan. You are prohibited from making further contributions to the HSA once enrolled in Medicare.
What if you want to execute a file-and-suspend strategy for Social Security? Could you contribute to an HSA in that situation? – No. Claiming Social Security benefits automatically triggers enrollment in Medicare Part A, which covers hospital and nursing home stays. That would remain true if you file and suspend your benefits while still working and participating in a high-deductible employer health insurance plan.
Do you sign up for Medicare when you retire if your former employer provides a retiree health benefit? – Even if your former employer offers a retiree health benefit, it is important to sign up for Medicare at age 65 to avoid penalties and coverage gaps. Employer-provided benefits usually provide a secondary layer of coverage, often covering co-pays or providing a drug benefit. The key to coordinating the two insurance plans is to understand who pays first. You should compare the cost of retiree coverage with what is available on the open Medicare market. There is little point in holding on to retiree coverage when it is not the best value for you. This is especially true for supplemental plans that cap out-of-pocket costs, either Medigap or Medicare Advantage.
Citations
1. http://1.usa.gov/1FijWUm – Medicare.gov
2. http://bit.ly/1MgvFDw – Consumer Reports
3. http://ti.me/1QD1YOe – Money.com
4. http://bit.ly/1InNAaO – MedicareRights.org
5. http://bit.ly/1FDp42d – AARP
